How to choose an insurance deductible

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When it comes to saving money on your car, health or homeowners insurance policies, one of the quickest ways to reduce your monthly premium is to raise your insurance deductible. But that can be a tricky decision that’s a matter of savings versus psychology.

Before you sign up for the highest possible deductible, you would be wise to consider just how much you’d save on your rates and whether you are financially and emotionally prepared to part with your cash if you do have to make a claim, says Doug Kinsey, a partner with Artifex Financial Group in Oakwood, Ohio.

“If you live hand-to-mouth, you may need to be fully insured” and not take the risk that you might have to pay the deductible, he says. “But if you handle money well and consistently have a reserve in the bank, then you might be able to be more risk-tolerant.”

You want a deductible you can live with

Bryon Pedevill, a vice president with PTL Insurance Brokers in Covina, Calif., says even if you can afford a high deductible, you still may prefer a lower one.

“Often people come back to me after they’ve paid $500 or $1,000 for their deductible and want to revisit their decision,” says Pedevill. “They realize that to actually spend that money is a lot more painful than they thought it would be.”

Other consumers try to use that threat of a big expense to their advantage and deliberately go for a high insurance deductible to help them resist making claims.

“Claim frequency can be used against you and can raise your insurance costs,” says Jeff Brown, president of Brown’s Insurance Agency in Manassas, Va. “You can use a high deductible to save you from yourself because you’re less likely to make a claim when you have to spend your own cash for the deductible. Making fewer claims could increase your affordable insurance options.”

The math on deductibles, by insurance type

While the psychological quandary of raising your deductible depends on your tolerance for risk, the math to calculate your potential savings is simpler, though it varies by insurance category.

Auto insurance. “On an auto insurance policy, you are not always saving a lot on your premiums with a higher deductible,” says Pedevill. “For example, on a 2010 Toyota Prius you would save about $24 to $30 annually by raising your comprehensive insurance deductible from $250 to $500. If you had to make a claim, it would take you years to recoup that extra $250 through premium savings.”

If your auto insurance premiums are high, Brown’s first choice would not be a high deductible on comprehensive coverage, which pays for damage from theft and disasters. Compared to those sorts of things, accidents are easier to avoid, so Brown recommends raising the deductible on your collision coverage instead. Controlling your driving habits can minimize the chance of an accident.

The amount you can save with a higher collision deductible depends on factors including your age. “If you are a mature 50-year-old driver with a clean driving record, you might only save $20 to $30 per year on your auto insurance premiums by raising your deductible from $250 to $500,” Brown says. “But if you are a younger driver, you might be able to save as much as $250 or $300.”

Home insurance. The differences in premiums when you raise the deductible for a home insurance policy are relatively small, Brown says. You’d save around $85 per year by switching from a $200 to a $500 deductible and save around $80 annually by switching from a $500 to a $1,000 deductible.

“If a $1,000 deductible would bankrupt you, then you should take the lower deductible,” he says. “If you chose a $200 deductible and had a claim for $350 in damages, would you turn it in? If not, then I would recommend you choose a $500 deductible. You just need to stop and weigh what you would or wouldn’t be able to handle.”

You may not have much leeway. Brown says some insurers now have a mandatory home insurance deductible of $1,000.

Health insurance. Health insurance deductibles present a more complicated question, particularly for families, says Kinsey. “You not only have to calculate the deductibles and copays for each individual who’s covered by the policy in order to figure out the maximum exposure you have to out-of-pocket expenses, but you also have to check the maximum annual limit of coverage,” he says. “You need to review your family’s typical health costs before you can compare health insurance policies.”

Brown says he doesn’t think anyone should take a higher deductible on health insurance, except maybe a person who’s alone on an individual policy.

“The risks are just too high if you’re insuring a family of five and you each have a high deductible,” says Brown. “If all five family members were injured in an accident, it could be extremely costly.”

In the end, it’s your call

Some people are simply not comfortable with a high deductible for any type of insurance because they don’t want big out-of-pocket costs for something that’s not their fault, such as an accident caused by the other driver or storm damage to their home, Brown says.

But the premium savings from a high insurance deductible could allow you to build up a larger emergency fund in the bank, Kinsey notes, so that you’re “self-insured” to a degree. Still, “you have to consider how much you are willing to sacrifice of your money before the insurance benefits kick in, and then balance that against the savings you’ll receive on your premiums.”